In the permanent-income hypothesis incorporating rational expectations,the short-run MPC is high when changes in current income
A)are small.
B)are considered a good predictor of future income changes.
C)are considered a poor predictor of future income changes.
D)occur when the economy is nearing cyclical peaks or troughs.

Question

Quizplus · Accepted Answer

In the permanent-income hypothesis incorporating rational expectations, consumers base their consumption decisions not only on their current income but also on their expectations of future income. So, when changes in current income are considered a good predictor of future income changes, consumers will adjust their consumption accordingly, leading to a higher short-run MPC.

In the Permanent-Income Hypothesis Incorporating Rational Expectations,the Short-Run MPC Is